Bloomberg News

Yen Gains Without Momentum as U.S. Hits Policy: Market Reversal

April 16, 2013

Yen Gains Without Momentum as U.S. Hits Policy

The yen has weakened 9.4 percent this year, the most among the 10 developed-nation currencies monitored by Bloomberg Correlation-Weighted Indexes. Photographer: Yuriko Nakao/Bloomberg

The yen’s strength after the U.S said it would press Japan to refrain from competitive devaluation will prove to be fleeting, trading patterns show.

After weakening to 99.95 per dollar on April 11, the yen rose as high as 95.80 today. The 100-per-dollar level is a key bearish point because it would represent a so-called 50 percent Fibonacci retracement between its high of 75.35 in November 2011 and a decade-low of 124.14 in 2007. Credit Suisse Group AG sees it tumbling to 115 by year-end.

Prime Minister Shinzo Abe is counting on a weaker yen to make exports more competitive, improve wages and boost inflation after almost two decades of stagnation in the world’s third- largest economy. New Bank of Japan (8301) Governor Haruhiko Kuroda announced an unprecedented stimulus package on April 4 that included doubling the monetary base in two years by buying about 7.5 trillion yen ($77 billion) of bonds a month.

“An ideal road map would be holding 100 at first, then seeing a pullback for correction, then a fresh move up into the 101.27 to 103.10 zone,” David Sneddon, a London-based technical analyst at Credit Suisse, said in an April 9 phone interview.

At stake is the credibility of Abe’s stimulus program and the chances of ending two decades of stagnation. The economy grew an annualized 0.2 percent in the fourth quarter of last year after two straight contractions. Prices excluding fresh food haven’t risen 2 percent in any year since 1997, and this February they fell 0.3 percent.

Italian Mathematician

Fibonacci retracement is named after a 12th century Italian mathematician and based on the theory that prices rise or fall by predictable amounts after reaching a high or low. In this and other forms of technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a currency, security or index.

Analysts draw the yen’s 50 percent Fibonacci retracement at the 100-per-dollar level because that price represents half of the currency’s losses against the greenback from 2007 to 2011. The yen has weakened 11 percent this year, the most among the 10 developed-nation currencies monitored by Bloomberg Correlation- Weighted Indexes.

“A lot of people will look at a breakout above 100 and say, well, this is a big psychological level and so that will be important, and argue for continued yen weakness,” Niall O’Connor, a technical analyst at JPMorgan Chase & Co. in New York, said in an April 11 phone interview.

Biggest Bear

Credit Suisse’s year-end forecast for the yen of 115 compares with the median of 100 among more than 50 estimates compiled by Bloomberg. Japan’s currency declined to 99.95 per dollar on April 11, the weakest since April 14, 2009, and traded at 97.59 as of 12:31 p.m. in New York.

The U.S. Treasury Department said April 8 it will press Japan to refrain from competitive devaluation while stopping short of accusing it of manipulating the yen in a report on exchange rates. European governments are urging it not to become too reliant on fiscal and monetary stimulus before a meeting of Group of 20 finance chiefs in Washington this week.

Treasury officials will pressure Japan to adhere to international commitments “to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the department said in its semi-annual currency report to Congress released April 8.

Bow Shot

“This is a shot across the BOJ’s bow,” Kit Juckes, a global strategist at Societe Generale SA in London, said in an e-mail. “Everyone still supports Japan’s fight against deflation, but the U.S. would much rather the yen did not weaken significantly further.”

Another technical indicator suggests that the yen’s decline may have reached its limit. The currency may face an area of so- called support against the dollar at the top of an indicator known as the monthly ichimoku cloud, according to Michael Hewson, an analyst at CMC Markets Plc in London.

Buy orders may be gathered at the level of 100.19 yen, according to data compiled by Bloomberg. The Japanese currency hasn’t traded through the top of the cloud since August 2007. When it weakened through the top in January 1997, it went on to tumble to 147.66 per dollar in August 1998 from 121.30, data compiled by Bloomberg show.

Ichimoku charts are used to predict a currency’s direction by analyzing the mid-points of historic highs and lows. The conversion line plots the sum of the highest high and lowest low over the prior nine data points. The baseline is the same calculation over the past 26 points. The cloud refers to the area between the first and second span lines on the chart and is used to show an area where trading orders may be clustered.

Risk Reversals

Traders are the most bearish in a month on the yen. The premium for one-year options granting the right to sell the Japanese currency against the dollar relative to those allowing for purchases is 0.68 percentage point, an indicator known as the 25-delta risk reversal shows. That exceeds the one-year average of 0.35 percentage point.

Investors were paying a premium for the right to buy the yen versus the greenback as recently as April 4, when Kuroda announced his plan to increase the BOJ’s monthly bond purchases to 7.5 trillion yen, exceeding the 5.2 trillion-yen forecast by economists surveyed by Bloomberg. He also set a two-year horizon for the goal of boosting inflation to 2 percent.

Forecasts Revised

Since the end of 2012, analysts have revised their fourth- quarter 2013 forecasts for the yen versus the euro and dollar by more than 10 percent. Those are the largest and second-largest cuts among 50 currency-pair estimates tracked by Bloomberg.

The yen declined to a more than three-year low of 131.12 per euro on April 11.

While the yen’s drop seems to have stalled at the 100-per- dollar Fibonacci retracement level, MacNeil Curry, the head of foreign-exchange and interest-rates technical strategy at Bank of America Merill Lynch in New York, expects the currency to breach this barrier.

“We’ll struggle in the short term to get through this zone, maybe like a week or two,” Curry said in an April 11 phone interview. “Then I think it gives way and you should see price action accelerate through.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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